From 6 April, most people buying a business have to offer a minimum level of pension provision to employees transferred under a sale governed by the Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE).
In this article, a solicitor from Thompsons' Employment Rights Unit in London considers the implications for employees of the new Transfer of Employment (Pension Protection) Regulations 2005.
What rights now apply?
Under TUPE, the position has always been that occupational pension rights relating to "old age, invalidity or survivors" do not transfer on the sale of a business. Only rights not falling within this definition, such as redundancy benefits and contractual entitlements under group personal pension arrangements, transfer. These rights are unchanged.
Likewise, public sector employees transferred to a private sector company have always had some protection, in that they have had the right to a "broadly comparable" pension arrangement. But in the private sector, companies had been left to sort out what pension provision they should make.
The provisions in the Pensions Act 2004 and the 2005 pension protection regulations now require purchasers to make a minimum level of pension provision for all transferred employees.
When do they apply?
The new provisions only apply on a TUPE transfer. In other words, on transfers of a business or sale of assets. They do not apply, therefore, when ownership changes as a result of a sale of shares.
In addition, the business being sold must have an occupational pension scheme already in place immediately before the transfer. Most employers with a defined contribution (money purchase) pension scheme or defined benefit pension arrangement (such as a final salary scheme) in place are, therefore, caught by the regulations.
For the provisions to apply to a money purchase scheme, however, the employer has to contribute to it. This would exclude most cases where the business only offers a stakeholder arrangement for its employees. The only exception is when employers have contributed to the scheme on behalf of active members, although they were not required to do so.
The requirements apply to employees who are active members of the scheme, and those eligible to join the scheme, but have not done so, even if there is a waiting period for joining the scheme that cannot be met due to the transfer.
What must be provided?
The purchaser of the business must provide a pension scheme for transferred employees, either by offering an occupational pension arrangement or a stakeholder arrangement, subject to minimum conditions.
If the purchaser offers membership of an occupational pension scheme, the criteria for compliance depend on the nature of the scheme offered.
If a money purchase scheme is on offer, the purchaser has to match the employee's contribution, up to the level of six per cent of basic pay ("relevant contributions").
If the scheme is not a money purchase scheme, (for example final salary), the purchaser has three options:
offer a scheme that meets the minimum statutory standard to enable it to contract-out from the state second pension scheme, known as the reference scheme test; or
match the employee's contribution to the scheme, up to the level of six per cent of basic pay for each active employee (ie make "relevant contributions"); or
provide a benefit of at least six per cent of pensionable pay for each year of employment together with any contributions made (with any employee contributions capped at six per cent of pensionable pay)
Alternatively, the purchaser can offer and make "relevant contributions" to a stakeholder pension scheme. In this case, the purchaser is required to match the employee's contribution to the scheme, up to the level of six per cent of basic pay for each active employee.
How is pay defined?
Gross basic pay is used to calculate "relevant contributions". In other words, any payments in respect of bonus, commission, overtime and similar payments are disregarded, as are deductions for tax and national insurance.
If the scheme is not a money purchase scheme, and the employer decides to offer a benefit of at least six per cent of pensionable pay for each year of service, the definition of "pensionable pay" can be defined in the scheme documents. Depending on the rules of the scheme, therefore, it may include emoluments such as overtime, bonuses and commission.
What about discrimination claims?
Discrimination claims may arise if the group of transferred employees is offered a different rate of contribution, or different benefits to existing employees. Most claims are currently on the basis of sex discrimination, but with age discrimination legislation scheduled to come into force from 1 October 2006 it is likely to be very relevant in this context.
For instance, if the scheme offered by the purchaser has an age restriction, transferred employees could not be excluded from joining the scheme. But this could lead to possible claims of discrimination by existing employees who had not been able to join the scheme because of the restrictions.
Unions should therefore alert purchasers to potential discrimination issues during negotiations at the time of the sale to try and get a better deal for their members.
What should Unions aim for in negotiations?
During negotiations regarding the sale of a business, unions should be aware of the minimum level of contributions that need to be made or the minimum level of benefits that need to be provided for transferred employees and use this as a starting point.
It is a condition of the Pensions Act for the purchaser to comply with these requirements as part of each transferred employee's contract of employment. The Act does, however, enable an agreement to be reached between the transferred employee and the purchaser to contract-out of this provision at any time once the employee becomes an employee of the purchaser.
If the purchaser offers a final salary scheme, and has the choice of the three options regarding benefit design, unions should aim for a benefit of at least six per cent of pensionable pay for each year of employment in addition to any contributions made by the member.
Comment
The Government should be applauded for setting a minimum level of pension provision that needs to be provided by purchasers. The problem is that because employers can chose to offer the cheapest option, the level of protection afforded is weak.
If the purchaser currently operates a final salary scheme there is no requirement to also provide membership of that scheme to transferred employees. The purchaser can decide to offer a money purchase or stakeholder scheme.
Contributions by the employer to money purchase or stakeholder schemes are dependent on the level of contribution that the employee makes. If the employee does not contribute, then nor does the employer; and even where both employee and employer contribute, the employer is unlikely to contribute above the cap of six per cent.